T-Mobile Gets the Prize, Sprint Shareholders Get the Spoils

T-Mobile's merger with Sprint doesn't end the evolution — or the competition — in the wireless business

Just over a week ago, I changed my view on T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S).

Source: r.classen / Shutterstock.com

“Speculators might want to step in now and grab some Sprint shares, while investors can step up to T-Mobile with confidence,” I wrote.

The approval of the merger by U.S. District Court Judge Victor Marrero did indeed represent a win for T-Mobile investors, who saw a gain of almost 12%. But it was even bigger for Sprint speculators, whose stock jumped 78%, closing at $8.52 per share.

I had been despairing about the deal ever getting done. But now it looks like that’s exactly what will happen. A vote by the last remaining regulator, the California Public Utilities Commission, could happen this month.

What Did They Win?

Now Sprint shareholders who stayed in, or got in before Marrero’s decision, are about to reap a windfall.

The initial deal valued Sprint shares at 0.10256 T-Mobile shares each. The day before Marrero ruled, Sprint closed at $4.80, T-Mobile at $84.53. T-Mobile opened for trading Feb. 12 at $94. This gives Sprint shares a current value of $9.64 each, assuming the original ratio is maintained. The same ratio, based on T-Mobile’s Feb. 10 price, would yield $8.67 for each Sprint share.

But investors are now betting it will be small, since T-Mobile needs the deal. It can afford to be generous. Even before Marrero’s ruling, T-Mobile shares were up 38% since the deal’s announcement on April 19, 2018. Sprint had fallen about 15%, but now trades for 30% more.

The Alternatives

What changed my mind was that alternatives to the deal were appearing. The success of Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Fi service, which is a mobile virtual network operator for both T-Mobile and Sprint, meant it could bid for a weakened Sprint. Comcast (NASDAQ:CMCSA), seeking traction for its Xfinity WiFi-based mobile service, could also have been a bidder.

There remain risks for the combination. Long-time Bell critic Karl Bode predicts prices will rise with the merger — that both Verizon Communications (NYSE:VZ) and AT&T (NYSE:T) will benefit from reduced competition.

But Dish Network (NASDAQ:DISH), which agreed to take assets from the combination and become a fourth national carrier, still plans to move forward with its plans, and it has a lot of spectrum. SpaceX, backed by Tesla (NASDAQ:TSLA) founder Elon Musk, plans to launch a satellite-based internet service later this year. Amazon (NASDAQ:AMZN) also wants to launch thousands of small satellites for Internet service. Alphabet or Comcast could still swoop in, this time for Dish, which has a market capitalization of just $23.2 billion.

The Bottom Line on T-Mobile Stock

There is no longer such a thing as phone service. Internet service providers (ISPs) have taken over the space.

Wireless ISPs, unlike those relying on wires, do re-sell their services through MVNOs. But this is a high-stakes, and high-cost, technology race. It’s not just about marketing. Competitors must be scaled to compete.

It’s clear that the major cloud competitors, led by Google and Amazon, want a piece of this action. They have the wherewithal to get it.